Annette Arribas - Senior Director, Global Investor Relations Ajei Gopal - Chief Executive Officer Maria Shields - Chief Financial Officer.
Monika Garg - KeyBanc Capital Markets Jay Vleeschhouwer - Griffin Securities Ken Talanian - Evercore ISI Ross MacMillan - RBC Capital Markets Anil Doradla - William Blair Rob Oliver - Robert W. Baird Sterling Auty - J. P. Morgan Steve Koenig - Wedbush Securities Gabriela Borges - Goldman Sachs Mark Schappel - Benchmark Company.
Ladies and gentlemen, thank you for standing by. And welcome to ANSYS' Second 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. At this time, I would like to turn the call 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 supporting data relative to our second quarter and the first half financial results and the business update as well as our Q3 and fiscal year 2017 outlook and the key underlying assumptions.
I would like to remind everyone that in addition to any risks and uncertainties that we highlight during the course of this call, important factors that may affect our future results are discussed at length in our public filings with the 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.
Statements made on today's call 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 would 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 am delighted to join you today to discuss the results of Q2 and the first half of 2017 and to update you on our progress. As you saw in our earnings documents, Q2 was an excellent quarter that exceeded the guidance we provided in May.
Our record deferred revenue and backlog of $656 million, which is a 25% year-over-year increase, and our 76% recurring revenue rate, coming from both leases and maintenance are leading indicators that our business is both strong and stable.
I am particularly excited that we delivered double-digit revenue growth in constant currency in the first half of this year. Because of our over performance in the first and our increasing confidence in the second half of the year along with an adjustment for currency, we are raising the midpoint of our revenue guidance for 2017 by $19 million.
I am proud of our progress and more confident than ever in both our opportunity and our ability to execute. I do want to caution you, however, that we still have a lot of work ahead of us, including a number of ongoing sales and go-to-market initiatives. Let me now spend a few minutes on our products.
ANSYS 18.1, launched in May, advanced our vision of pervasive engineering simulation by introducing a number of enhancements, most notably pushing the envelope on performance and memory usage.
Saudi Aramco and King Abdullah University of Science and Technology recently set a new supercomputing milestone by scaling ANSYS' Fluent solvers to nearly 200,000 computer cores, more than 5 times the record we set just three years ago.
A simulation that once took weeks to perform can now be performed in a day, allowing organizations to reduce design development time and better predict equipment performance. Saudi Aramco will apply this technology to make more informed and timely decisions to help optimize oilfield operations.
In June, at the Annual Design Automation Conference in Austin, several customers including Broadcom, Samsung, Hisilicon and Nvidia, shared their successes using our solutions to address power, reliability and thermal issues in their cutting-edge system on chip designs.
We also released several new additions to our suite of semiconductor products to help customers improve performance and reliability, while reducing cost for chips design for the automotive, mobile and high performance computing markets.
The new version of ANSYS Redhawk achieved this by allowing users to take advantage of Big Data analytics and machine learning to improve their designs. In addition, we delivered a 10x improvement in capacity and scalability over previous releases of Redhawk, by efficiently using cloud environment.
As a result of our advancements, a major mobile processor company now has full chip visibility into power integrity with a 3D integrated circuit flow with high bandwidth memory, and that's a first for this global brand.
Redhawk was also key in growing businesses at another Tier 1 customer, focused on high performance computing, driven by the current needs of 7 nanometers and their future needs at 5 nanometers.
Our vision of pervasive engineering simulation continues to give us access to a large and growing market opportunity and drives the broad adoption of ANSYS solutions across multiple industries. Let me illustrate by highlighting some of our Q2 successes in 2 of our strong industries, communications and aerospace.
The communications sector is seeing increasing demand for next generation high bandwidth low latency solutions. ViaSat is leveraging our industry leading workflow for chip package support system simulation into their design process.
Their most recent success using our solution surrounds the launch of ViaSat-2, their second-generation satellite, which is expected to provide unprecedented bandwidth and deliver 7x more coverage as compared to their first-generation satellite.
Based on this success, ViaSat signed a second multi-year agreement with ANSYS to help develop their new global constellation of ViaSat-3 class satellites. As, Huawei has an extensive portfolio of end-to-end solutions in telecommunications, enterprise networks, devices and cloud computing.
In Q2, Huawei expanded its use of ANSYS solutions, bringing high accuracy analysis to its leading products. Huawei has now expanded the use of our technology to include signal integrity, power integrity and thermal analysis.
Also in Q2, CommScope, a leader in network infrastructure, broadened their ANSYS adoption in a multiyear agreement to deliver high-accuracy simulations in support of their 5G initiatives.
A major global electronics and telecommunications company increased its 25-year relationship with ANSYS with a new Q2 commitment, advancing their multiphysics adoption and displacing a competitor solution.
Our pervasive simulation capabilities helped this customer achieve faster turnaround times, reduced development risk and gain early validation of product performance for 5G systems. ANSYS has historically been strong in the aerospace sector, and Q2 was no different.
Meggitt PLC, a leader in engineering extreme environment components and smart sub-systems, has increased its adoption of ANSYS SCADE simulation for aerospace and defense safety critical applications.
The global agreement will allow Meggitt to further accelerate time-to-market, reducing cost both in time and prevention of costly late stage design changes.
SCADE enables customer to increase the efficiency and productivity of their current software development processes by leveraging simulation and certified cogeneration to reduce manual reviews and to help ensure accurate, safe and reliable embedded software that is DO-178C compliant for the aerospace industry and ISO 26262 compliant for the automotive industry.
In a Q2 transaction, a large U.S. defense contractor has chosen SCADE as their solution to support high reliability for their next generation of flight controls. This longtime ANSYS customer extended their commitment to us by adding SCADE onto an established ANSYS platform.
This is a common journey for our customers and highlights our large cross-sell opportunity. The strength of our product portfolio and our vision of pervasive engineering simulation is reflected in the traction we are getting with startups. We launched the ANSYS startup program last fall to put simulation into the hands of emerging companies.
The program now boasts hundreds of startup companies from around the world, with 76 new logos added in Q2 alone. It is exciting that these next-generation companies are building their businesses in part on ANSYS technology. Let me now shift to the performance of our 3 major sales regions.
In North America, revenue grew 13% in Q2, helped by strength in the aerospace and defense, high-tech and automotive industries. We're gaining traction in automotive, for example, as manufacturers adopt ANSYS' multiphysics solutions for the development of autonomous and energy efficient vehicles.
Our lease revenue grew 20%, consistent with the trend we have highlighted in past calls of a continued shift in preference to lease licenses, particularly in our largest customers in North America. Our slowest growth region was again Europe, delivering constant currency revenue growth of 3% in Q2. We saw weakness in both Germany and the U.K.
However, excluding those regions, for the remainder of Europe, we saw double-digit constant currency growth for the second quarter in a row. Our performance in Europe, while disappointing, was in line with our Q2 forecast.
We know our challenges are in sales execution and our direct business, and as I have shared with you on previous calls, we have put a plan in place and are taking appropriate actions.
Our actions have included putting in place a new head of sales for Europe, who's based out of Germany, and was previously our head of sales for Asia Pacific, where he led our successful go-to-market transformation and channel expansion. We have also hired a new global head of major accounts, also based in Germany, and reporting to Rick Mahoney.
We also have new leadership for 3 of the 5 regions in Europe. Our rebuilding efforts should set the stage for improved performance in 2018 and beyond. Shifting to Asia-Pacific. The Q2 results reflect overall revenue growth of 8% that included a 14% and 9% growth in maintenance and lease revenue respectfully, all in constant currency.
China and Taiwan continue to deliver strong revenue growth, both in excess of 20% in constant currency for the first half of the year. From an industry perspective, the regional performance was driven by sales into the electronics, aerospace and defense, automotive and industrial equipment sectors.
The region also continues to benefit from investment in domestic development programs, particularly in China, India and South Korea. I'm also delighted to announce that we have hired a new head of sales for Asia Pacific, replacing our former leader, who, as I mentioned earlier, is now leading sales in Europe.
Now, I would like to turn to M&A for a moment. You might have seen our acquisition -- our announcement a few weeks ago about our acquisition of Computer Engineering International, or CEI.
A longtime ANSYS ecosystem partner, CEI augments ANSYS' solutions by helping users to quickly and easily visualize and analyze the immense data sets produced by complex simulations, so that they can rapidly get to the right engineering decisions.
While the deal isn't material to our 2017 revenue, we're incredibly excited to add this very talented team and this great technology to ANSYS. Moving onto the ANSYS executive team. I am delighted that Janet Lee has joined us as our new General Counsel. Janet has decades of experience that will help ANSYS as we enter the next phase of our growth.
She has held leadership positions at HERE Technologies, Nokia and AOL, and worked at law firms in the United States and abroad. In her short tenure here, Janet has already made a big impact, and we're really delighted to have her counsel. Finally, I'd like to share with you a different sort of customer win.
Emirates Team New Zealand used ANSYS technology and a simulation-driven development approach to make engineering and design improvements to optimize their yacht's performance. The team's seven-one win in the America's Cup speaks for itself, and everyone at ANSYS was proud of our part in the victory.
And with that, I will now turn the call over to Maria to discuss our financial results in a little bit more detail.
Maria?.
Thank you, Ajei. For the next few minutes, I'll review our second quarter financial results and comment on our Q3 and updated fiscal year 2017 outlook. All of the financial figures that I will be mentioning will be in terms of non-GAAP, unless I state otherwise. We ended Q2 posting strong results across most aspects of our business.
This enabled us to deliver record revenue in earnings, which exceeded the upper end of our guidance. Key highlights include total revenue of $264.3 million for the quarter, a year-over-year growth of 8% in constant currency. Our Q2 revenue results include a negative currency impact of $2.1 million.
Our recurring revenue for the second quarter totaled $200.3 million, or 76% of revenue, and grew 11% in constant currency over last year's second quarter.
The Company's consistent ability to offer our customers the choice of licensing that they desire, while also maintaining a solid base of recurring revenue, remains one of the hallmarks of our business model.
During Q2, we closed 28 seven-figure deals, including four customers with orders in excess of 5 million and one customer with orders in excess of 10 million. For the first half of 2017, we had 67 customers with orders in excess of 1 million, including nine customers with orders over 5 million, and two customers with orders over 10 million.
These orders, combined with our overall sales growth in recent quarters and continued strong renewal rates, contributed to a deferred revenue and backlog balance of $655.8 million. This is a record high and represents 25% growth as compared to Q2 of 2016. This positions us well for Q3 and the remainder of 2017.
In Q2, we achieved a gross margin of 90% and an operating margin of 48.3%.
These were both ahead of the margin guidance that we had provided on the last earnings call, largely due to a combination of hiring plans that did not close at the pace that we had assumed coming into the quarter, and the reversal of an R&D tax credit reserve in France of approximately $1 million as a result of the favorable conclusion of a tax audit.
Including the second half impact of the addition of the recent CEI acquisition, combined with our internal hiring and investment plans, we are currently targeting full year 2017 operating margin in the range of 46% to 47%. We reported non-GAAP EPS of $0.99 for the second quarter.
Our Q2 GAAP results included $2 million of charges related to our previously announced workforce realignment. And currently, we are expecting to incur additional charges of up to $2 million, or $1.3 million net of tax, primarily during the third quarter of 2017 as we complete the realignment initiative.
Our operating cash flow for the second quarter continued to be very strong, and totaled $112 million, a 57% increase over last Q2. We ended the quarter with cash and short-term investments of $863 million, which was essentially flat with our closing balance in Q1.
Keeping with our commitment to return capital to our stockholders, during Q2, we repurchased a total of 1 million shares. For the first half of 2017, we have completed repurchases of 2 million shares, and there are 3.5 million shares of capacity remaining in our authorized repurchase program.
Now, let's turn to guidance for the third quarter and full year 2017. We've initiated our outlook for Q3, with non-GAAP revenue in the range of $258 million to $267 million, which represents constant currency revenue growth of approximately 7% at the midpoint, and non-GAAP EPS in the range of $0.94 to $0.98.
With respect to fiscal year 2017, we are again increasing our outlook to factor in our Q2 performance, movements in currency since we last provided guidance in May, the impact of the CEI acquisition for the second half of the year and our increasing confidence in the sales pipeline.
This translates to non-GAAP revenue in the range of $1,053,000,000 to $1,073,000,000 and non-GAAP EPS of $3.77 to $3.89. We are targeting a non-GAAP gross profit margin of approximately 90% for the third quarter and full year, and non-GAAP operating margins of 47% to 48% for Q3 and 46% to 47% for fiscal year 2017.
For the details around specific currency and tax rates and the other assumptions that have been factored into our outlook for Q3 and for 2017, are contained in the prepared remarks document.
And finally, before closing, I would like to remind everyone that our Investor Day will be held on Thursday, September 14, at the Hyatt Regency at the Pittsburgh Airport. Details on the agenda, as well as the registration form, are available on the IR homepage of our website.
And since space is limited, if you expect to attend in person, please register as soon as possible, and please plan to join us the evening before the reception with management. We will also hold a webcast for the event, accessible on our IR website for those who can't attend in person. So, operator, we can now open the phone lines to take questions..
[Operator Instructions] The first question will come from Monika Garg of KeyBanc. Please go ahead..
You talked about strength in the semi industry. I have a question on the Redhawk too. Could you talk about how -- before you had talked about the consolidation of semi industry impacting its growth, maybe talk about how this business is growing. Any quantitative numbers could be helpful.
Also, cadence tool Walter seems to be growing strong in power analysis also. Also talk about competition in the market..
Sure. So what we are seeing for our tools in the space, I mean, we're seeing a demand as customers are going to a more and more advanced process nodes. We see the opportunity for simulation continue to grow. And so the cost of failure, if you consider something like 7-nanometers, the cost of failure is something like $270 million per design.
And so customers are very keen to run more and more simulations, and we see that as an advantage to us because that's where we come in to provide the assurance around the capability to the design from a power and from a thermal perspective. So that's one aspect of it, is more simulation being driven as we go to advanced process nodes.
The other thing, of course, is as we think about the nature of these solutions, many of our customers are not just focused on a single physics, they're focused on multiphysics, so they're trying to run co-simulations in the chip and package to deal with things like power and thermal effects.
And that's, again, an area where we shine, because we're able to bring in a number of technology from across our portfolio to be able to help our customers achieve this. And I think the other area that where we are excited is, of course, we made a lot of investments in the Big Data and the analytics piece of our portfolio.
And in the DAC conference, as I announced, we brought together -- we brought into our Redhawk solution, we've brought together some pretty compelling Big Data and analytics capabilities as we continue to transform that -- continue to evolve that product and as we continue address the needs of the customers at the higher end, and at these advanced process nodes.
As far as the competitive dynamic is concerned, I think that our customers really value what we are trying to accomplish in terms of accuracy and speed of simulation. And we feel very confident in our product roadmap and our capabilities to manage the competitive landscape..
And then, Maria, a question on the cash flow of -- is your cash flow guidance unchanged? And good strong cash flow in first half, are you raising or why not raise the guidance?.
Yes. So Monika, we are taking up our guidance for full year cash flow to now $385 million to $410 million..
Our next question will come from Jay Vleeschhouwer with Griffin Securities. Please go ahead..
For the trailing 12 months, your bookings were up about 16%, and that's the third trailing 12-month period in which you've had a double digit bookings growth.
Would you expect to be able to sustain that for 2017? And perhaps beyond in terms of showing that kind of double digit growth for bookings on a DTM basis? And with respect to the end market composition of bookings, I'm -- totally understand, of course, the variability from quarter-to-quarter by end market, but when we back into an approximation of your bookings by end market, on a quarterly basis, from the data that you gave, it does look as though you had, and perhaps you can correct this if it's wrong, a fairly material sequential decline in automotive from Q1 after having several quarters in a row of pretty good quarterly demand in automotive.
On the other hand, you had very strong results again in electronics and semi.
So maybe you could just talk about some of the quarter-to-quarter dynamics by end market? And then how that comprises your thinking for 2017?.
Yes, so Jay, let me start. We don't comment on bookings guidance, but a couple of things around bookings that I think are important to consider. If you take a look at just the quarter, it would appear on the surface that bookings growth has declined.
However, if you just take a look at the fact that some of these larger deals and the timing of when they close can have extreme volatility on the bookings results. So last year in Q2, we had 2 $10 million deals, this year we had 1. And just that shift impacts the bookings growth by 6.5% for the quarter.
We have closed the first half with 9% bookings growth. And we closed everything that was in the pipeline and scheduled to close that we had planned.
But as you commented, there are some deals that are particularly slated for the second half, a number of which are in the industries that you commented on relative to Q2, that are scheduled to close in the second half that are currently part of our guidance.
And as you know, I always suggested that trailing 12 months performance within the industries is probably more indicative of the performance than looking at any quarter. Because when these deals, these larger deals close, can definitely skew the results in any one of the industry subsets..
Okay. My technology follow-up for Ajei is that we saw it back, as you pointed out, the updating of Redhawk and your other EDA tools based on your new SeaScape architecture.
And that has given you some good capacity increases there, but the question is, when do you think you'll follow through in your commitment of bringing your other non-EDA physics and solvers to that architecture to get similar kinds of capacity and analytics performance in the other solvers?.
Right.
So as I mentioned earlier, we have a number of customers, obviously, who are looking to figure out the impact of the multiphysics impacts on their designs, and that goes across things like power, timing thermal, mechanical, electromagnetics, so that they can essentially avoid overdesign, on the one hand, or they can avoid the risk of complex and costly design failures.
And so they're relying on simulation across all of these, in this multiphysics environment. And our semiconductor products now have integrated workflow with our electronics and our mechanical products. And so that allows customers to take advantage of this integrated direction that we are driving.
And of course, as we continue to make progress on the SeaScape platform, this workflow will continue to get augmented to reflect the integration of SeaScape into that workflow..
The next question will come from Ken Talanian with Evercore ISI..
I was wondering if you could talk about the traction you saw from channel partners during the quarter? And where that is relative to where you'd like to be?.
Yes, so Ken, with respect to the quarter, the channel continues to perform on plan, and has really refocused as we've undertaken these past couple of years of refocusing on the channel.
The channel itself has refocused on, not only the renewal portion of the business, but more importantly, driving new business, not only in existing accounts but in new logos. So we are very excited about the performance of the channel and the progress that we've made in that area.
And we will continue in, particularly, in Europe as we look at some of our go-to-market initiatives. We anticipate that the gentleman who is now in charge of our European business will take a look at similar opportunities as he did in Asia Pacific to bolster our go-to-market by adding additional channel capacity. So we will continue in that area..
And just as a follow-up, I was curious have you seen any changes to your retention rates on the lease side?.
No. Our overall renewal rates on both leased and the maintenance business are in line with historical..
Thank you. Our next question will come from Ross MacMillan with RBC Capital Markets. Please go ahead..
Ajei, maybe just for you first on Europe, given the very substantial changes you're making there, what's your expectation for the timing of when the new leader will -- Tom will have the -- will kind of get his arms this and start to see improved performance in core geographies? And just related to that, the new head of global major account, is that a brand-new position? Or is it a brand-new -- or is it a replacement, maybe with a geographical change?.
So let me address that and perhaps put the question a little bit in context. So we've had our new leader for Europe in placed now for a couple of quarters; he's had his opportunity to get his hands around the problems that we are dealing with in Europe.
He -- and as I mentioned in my script, the growth that we've had outside of the UK and Germany was essentially double-digit constant currency for the rest of Europe. And so we don't have a universal problem across all of Europe, we have a more targeted problem in a couple of areas that we need to be very focused on.
And clearly, the UK and Germany represent areas that we need to improve our performance. We've, as I mentioned, we've made all these personnel changes. But if I think about the UK as an example.
In the past, we had perhaps over-rotated on to oil and gas and with the -- obviously, the multiyear impact on that business on that sector, we've had to re-pivot and move to some of the other areas where we've frankly been historically strong and our products really work well, but we hadn't necessarily been in the market in the UK in those sectors.
And that's an area where we now have incremental focus, and we're trying to get that done. Your point about major accounts. If you think about Germany, where of course, there's a very strong automotive industry, many of those were within our major accounts team, and we already had a major accounts team that was in place. That was run out of Canonsburg.
And what we've done now is the new leader for that major accounts team, which is a global role, it has worldwide responsibility across the U.S., Europe and Asia, that is now based out of our -- that individual is now based out of our offices in Germany and reports directly into Rick.
So we are -- we have people in Europe who are not just regionally -- not only have regional sales responsibilities but also have global sales responsibility. So I think there is a number of elements. We are certainly thinking about the channel and the importance of the channel, as Maria mentioned.
And as she said, the individual who's responsible for Europe is someone who’s had a success in our channel turnaround in Asia. And we are excited about his savviness about the channel and as well as his prior performance. So there's a number of things that we have underway. As you know, with any sales organization, it takes a couple of quarters.
We've been in this transition now for a couple of quarters, and I'm expecting it certainly to kick in as we get into 2018 and beyond. That's when we start to see the results of what we're doing..
And Maria, my follow up. Just maybe two. Just on the rates for the year, can you maybe parse out currency versus fundamentals? And then on R&D, it's moved a lot between Q1 and Q2, just the dollars.
Was there something peculiar in terms of timing, if you could just drill down on that as well?.
Yes. So we're off on the currency, I would say in the range of $7 million to $10 million, and then, the remainder being the fundamentals of what we see in the business for the second half. With respect to your question on R&D, in Q1, there were significant charges relative to the realignment in R&D that didn't necessarily repeat in Q2.
And as I mentioned in my prepared remarks in Q2, the R&D line also benefited from an additional approximately $1 million of the reversal of reserve that we had established in connection with a challenge to some R&D credits in France.
And our team was able to successfully complete the audit, and the French government allowed us to maintain those credits, so we reversed that reserve in the Q2 P&L through the R&D line..
The next question will be from Anil Doradla with William Blair. Please go ahead..
Good job on the reserves. So Ajei, the question that I had was around investments. Now since coming onboard, one of the initiatives that you've talked about is investing in the channel, investing in the sales force. You spoke a lot about that today. And you do expect to see some of the benefits.
But from a spending point of view, what innings are you in right now? Both from an internal sales spend point of view and kind of the channels investment and spend point of view? Not necessarily through when you're going to start seeing the benefits, but really from a spend point of view..
Yes. So we are, I would say, relatively early into this transformation that we've been talking about. I've been CEO now for two quarters, and obviously, I was here for Q4 of last year as well as President and COO. We have a upcoming planning process that the team is working through, which will ultimately lead to our budget for next year.
And what we are in the process of doing right now is evaluating what the budget should look like for next year, and where we should be spending our resources. As you can imagine, we have a number of areas where we could obviously invest, and we have to prioritize, and that's the process that we'll be going through in the fall..
So Ajei, given that you are still in the early stages and it seems like there is some spend, when I look at the operating margins, I mean, look at the first half plus whatever you've given out on the September guidance, you folks are maintaining your 46% to 47% for the full year on operating margins. And just doing a little bit of a math.
I mean, when we look at the December quarter, shall we be looking at kind of a step down? Or are the 46% to 47% that you've given right now is kind of conservative?.
So what I'd say is it's not conservative, because Q4, based on our current plans, will include higher commissions and will include some of the run rates from the additional hires that we've got in place.
Not only that came in late in the second quarter, you heard some of them that Ajei highlighted in his remarks, but hires that we have planned for the second half of the year.
What I'd say is -- when we announced the realignment initiative, the first thing that we did was look at where we were going to redeploy those dollars into incremental investment in the business. And that was the first stage before doing realignment plus incremental.
So this year, we're working our way through the redeployment of those dollars, whether it's in new positions or whether it's in projects. And then I think, as Ajei mentioned, we'll be working through the operating plan.
Because given the current environment for simulation, and given the conversations that we're having with our customers around the opportunities, there is tremendous areas for us to invest in to not only maintain our leadership, but more importantly, to set the stages for longer-term growth opportunities..
The next question will be from Rob Oliver with Robert W. Baird. Please go ahead..
Ajei, I know you gave some color on the call about some of the large deals. I was wondering if we could drill down a little bit more on that? And you could talk about the enterprise portfolio, sales efforts and some of Rick's effort to broaden out the use base of the software within large accounts.
It sounds as if customers are increasingly willing obviously to take ratable here.
Is that helping to increase the appetite? And what are you seeing in terms of more pervasive usage of the products, even maybe more downstream than you typically would have sold to in the past?.
So as Maria said, there is a huge appetite for our solutions out there. And in part, it's driven by, as I've said in the past, it's driven by the fact that many of our customers are going through this next phase of their design cycles to factor in these big changes in the way that they have to think about how their products are going to be operating.
So we have -- we're having conversations, for example, around IoT. We're having conversations around autonomous. We're having conversations around additive. We're having conversations around multiphysics.
And simulation plays a really completing role in all of these conversations, because in many ways, simulation helps our customers accelerate their innovation to market. And that's been a universal.
Now for smaller companies, obviously, they have -- they're much more sensitive to budgets, but for larger companies and especially when you think about some of these broader, much more sophisticated initiatives, we are able to have this multiphysics conversation in a much more strategic manner with them, with these changes.
I mentioned 5G as an example. If you take 5G, the complexity of building these next generation 5G solutions includes elements that have to do with incentive design, that have to interference.
You're dealing with very high-bandwidth solutions, you have to be very focused on the interactions between different antennas and how you would be for example in a mobile device -- with a mobile device in the car, how we pick up these signals. All of these are incredibly complicated and that pushes towards more simulations.
So we're seeing a lot of excitement on the part of the customers as we talk about our capabilities. And as we start to put in place the repeatable methodologies within these major accounts, that gives us an opportunity to be able to cross-sell across the portfolio. I mentioned one cross-sell example in my prepared remark or in my script.
And in general, when the company is buying to the ANSYS' platform, it is easily -- it is much easier for us to be able to establish that cross-sell capability. So -- and oftentimes, we will enter a customer with maybe a long one physics or maybe a relatively smaller deal.
And then we'll work away with multiple deals into a large deployment across multiple physics, that's pretty significant. And that's why, as I mentioned to you in the last call, what Rick and his team are building is not so much an episodic onetime ELA.
What they're trying to do is to make sure that we can build an ongoing metaphorical platform, if you will, between the customers and ANSYS, so that we can understand that there's challenges, and we can help them use our technologies to address the challenges, which results in a sequence of activities and an ongoing ability on our part to be able to monetize that relationship.
Now Rick will be able to talk more about his strategy around go-to-market, around major accounts, what we're doing on the territories, how we're working with the channel. He'll be able to go into much more detail during our Investor Day -- during his Investor Day presentation in September..
And just a very quick follow-up for Maria.
On the hiring front, aside from the high-profile hires in motion of people around movement, was there anything particular this quarter that caused the hiring to be lag -- to lag or be deferred? And I think you mentioned that some of the hires have already been made for next quarter, or is that just merely timing?.
Yes. It's timing, and it's also, I would say, particularly, in the R&D area. The -- some of the skill sets that we're seeking are very unique. So it takes time to find qualified candidates, and to go through the interview process and to recruit them.
As you can imagine, many of these people, particularly in certain geographies, who have jobs but are interested in joining, have longer-term commitments before they can leave their current employment.
So we are not just looking to check the box and fill bodies, we're looking for people to join our team who will help us to continue to grow the business and who will be with us as many of our R&D folks are for literally decades..
Our next question will be from Sterling Auty with J. P. Morgan..
Maria, I want to follow-up on your comments to Jay, on the bookings front.
Is it right to interpret what you're saying is you're expecting stronger bookings and bookings growth in the second half rather than just looking at the June quarter, where I think the reported bookings were, just, call it, roughly flat year-over-year?.
Yes. So Sterling, no doubt the second half, our plans in the sales pipeline do include a larger number of large deals.
And so we are -- our current plan is that they will close, but we also understand we are given a range, because with large deals, timing can always be a challenge, particularly in Q4 as you get with competing holidays and other events. So that is, in fact, exactly what we're seeing in the second half is more bookings on the larger deals..
And then, Ajei, in terms of -- a lot of comments around semiconductors and their strength there.
Is there a way to characterize or give us a sense of what the growth rates look like from the various segments? Meaning the semis area versus fluids, versus multiphysics or is it just not how you look at the business?.
No. We don't really break that out. We don't really break that out. But I think it's fair to say when you look at the -- when you look at a strategy, our strategy of course, is around multiphysics, and it's about being able to sell the whole portfolio.
When you look at some of the initiatives that customers are driving, there is a lot of excitement, of course, about electronics and electronics within a product that previously didn't have smart controls, and that's something that we are actively involved with, and that's where some of our capabilities on antenna design, signal integrity and so forth come in.
And then of course, when you start to think about chip package system, that's what brings together our semiconductor products and our electronics products as well as some of the mechanical and fluid products when you start to think about issues of thermal, et cetera.
So there are a number of different multiphysics initiatives that we drive across the portfolio. Our strategy, as I've said before, is around pervasive engineering simulation. We believe that customers are looking for the best-in-class simulation technologies, because that's what allows them to build products with a high degree of confidence.
They're not looking for a basket of goods, they're looking for best-in-class. That's what we focus on. And we are committed to a strategy of driving this multiphysics solution capability across, frankly, all of our physics embedded software. All of that as part of the strategy that we have on the table.
So that's how we think about our business, and that's how we think about our success..
Our next question comes from Steve Koenig with Wedbush Securities. Please go ahead..
I wanted to ask about current bookings, which is something that ANSYS has trained us to look at here. And Maria, you already talked about bookings, maybe some of those comments apply here. In the quarter, current bookings look like grew maybe 2% to 3%.
It sounds like large deal, comps, timing of renewals, you also mentioned execution in Europe, could you maybe parse out the importance of those factors? And related to the current bookings metric, if that's the best indicator of how the business is growing, how should we think about the growth trend for that metric and the opportunity to accelerate it?.
Yes. So you're correct relative to your calculation on growth rate for the quarter. I would say, the number one factor was, no doubt, the large deal. So as I mentioned, in response to an earlier question, Steve, if you just look at last year's Q2, we had two $10 million deals. This year, we had one.
And those $10 million deals sometimes are multiyear deals. So they won't necessarily renew the following year. So just one deal of $10 million has an impact of 6.5% on the bookings growth just in the second quarter.
So as we've tried to highlight, as these larger deals become more of our fabric, there is going to be volatility in bookings in quarter-to-quarter depending on the cycle of when these deals happen.
It's a reality, but it's one that just demonstrates, what we've been saying is, our customers' appetite to increase the footprint of our technology and our solutions across their business to help them solve problems that they've never had to solve before. And we are uniquely positioned given our portfolio to help them.
So the volatility is just something that is going to be part of the business and probably something that would lend itself to looking at annual metrics as opposed to quarterly metrics, because things can easily move from quarter-to-quarter as we've seen..
So Maria, the second part of that question, I want to get to that, which is that how should we think about the trend on that? Or maybe, Ajei, you want to speak to that, and the opportunity to accelerate your growth? And I did want to ask a follow-up to Ajei about maybe just getting an update on ANSYS' efforts with IoT and Digital Twin.
A little more color there would be great..
So let me just quickly take the question on IoT and Digital Twin. As I said to you before, we have a number of customers who are excited about IoT, Digital Twin.
In May, we announced a partnership with PTC around their ThingWorx platform, and that's going to allow customers to essentially transform a raw data into actionable intelligence using the physics models that we're able to bring to market, so that was something that we were pretty excited about.
And we obviously we see that the IoT conversation driving the discussion within our customers about connectivity. So that naturally moves then to what about wireless connectivity solutions and technologies, and that leads to a conversation, for example, about 5G antenna layout. Again, these are areas that we're very strong.
So the IoT conversation really plays to our strength of multiphysics so that we can provide a real physics-based model in a Digital Twin that allows customers to do predictive maintenance.
And that's a very important word for them, predictive maintenance and being proactive about that, because when you start to think about customers that for example may have thousands and thousands or tens of thousands, I mean, even hundreds of thousands of assets out there, the cost of maintenance is significant, and being able to do predictive maintenance is important.
And so if you were to use something like simulation, Digital Twins, we think that in many cases, it could be a significant percentage of the failures that you see in operations could be avoided through the use of Digital Twin. So we're able to make this case with our customers.
They see that, then they move to a conversation about wireless and it plays to our sweet spot. So that's, I think, an area where we see a lot of future opportunity for us as well..
Yes. And Steve, relative to your question on trends and how to think about it. Here's the way that we view it. We had a strong, really strong Q4 last year. We had a strong Q1. Our first half bookings is 9%, and we've got large deals that are scheduled for the second half.
So, overall, we feel that we're making very good progress in line with our plan, and we are extremely confident that the addition of the new global head of major accounts and some of the positions that he'll be adding to his team will even better position us as we head into 2018..
The next question will come from Gabriela Borges with Goldman Sachs. Please go ahead..
Maybe just a follow up on the overall demand environment. Ajei, if you could comment if you're seeing any change in the macros that you run to -- in 2Q versus 1Q? And as we go into the second half, the commentary on the large deals potentially closing deals, just been pretty consistent over the last couple of quarters.
Is the visibility into those large deals improving? And maybe we can compare how the visibility was this time last year going to what ultimately ended up being a very strong 4Q '16?.
It's hard for me to give you a year-over-year comparison about visibility, because I wasn't here at this time last year. And obviously, we have changes in leadership in place. So I think, giving you that subject of color is kind of hard to do on a year-over-year basis. Let me give you a couple of comments about some of the industries.
Obviously, I don't think there's any fundamental change between last quarter and this quarter in terms of how the industries themselves are spending or the sectors themselves are spending. We don't see any fundamental profound change from quarter-to-quarter. They're obviously small variations here and there.
As we've highlighted in the past, automotive continues to be pretty excited about the autonomous transformation that's taking place, and that's an area that we have good solutions, and that's an area that's driving our connection in our relationship with the automotive companies. So autonomous, ADAS, that continues to drive some of the conversations.
Chip package system on electronics, as I said, with the electronics essentially becoming ubiquitous, it's electronics is 35% of the billing materials of the car, today it's going to 50%.
The discussions about chip package board system, those kind of conversations were able to effectively drive, and that's also driving some of our engagement in the electronics and the high-tech sector as well as, of course, things like telecommunications 5G, that I've highlighted a couple of times.
So there's no fundamental and profound change, but there continues to be I think strong demand for the ANSYS portfolio across all dimensions. The one sector that we've highlighted again in the past is oil and gas, that's still historically off where it used to be, and years ago, but that -- it really hasn't changed quarter-over-quarter..
That's helpful color. And as a follow-up, if I may. Last quarter we talked about the decision not to report ELA, sometimes they can be artificially restricting to focus on onetime large deals.
As you went through 2Q, did you see any change in how the sales force interacted with customers? And in some of the large deals that were closed in 2Q versus 1Q because of the decision not to report ELAs?.
As we said, what we're trying to accomplish is to make sure we have an ongoing relationship between ANSYS and the customers around which we can build a metaphorical platform and I've used this word a couple of times around which we can monetize our solutions.
That doesn't translate into a single deal, that translates into multiple transactions that might spread over multiple quarters. And that strategy is something that's very important for us. Customers oftentimes will come in with 1 physics, and then will start to put in a second physics.
And as they broaden their ANSYS product platform, they will add more and more to that product platform. I gave an example of a longtime customer who was using pretty much most of the ANSYS portfolio in the platform, and -- but they were not using ANSYS SCADE, and we were able to have a conversation with them, and that became part of the relationship.
So the focus has always been on expanding our footprint within the customers, and that's essentially where we are as a company. We see that as an opportunity to build on these multiyear relationships and to add more technology into those relationships..
The next question will come from Mark Schappel with Benchmark..
Ajei, just one question. It's on CEI. It appears that they built themselves a post-processing tool. And this is an area that ANSYS has always been relatively strong.
And I was just wondering if you could just go into a little bit more detail what capabilities CEI is bring to ANSYS?.
Sure. CEI has been a long-time ANSYS ecosystem partner. We've had collaborations with them for many years. They certainly help on the post-processing as you rightly pointed out.
They add in -- essentially, part of what they do is give you photorealistic images so it makes the post-processing much more -- it pops more, it's more -- it's easier for people to consume.
They're able to pull together multiple streams of simulation data more quickly, and you can integrate multiple views that can show different variable graphics, et cetera, into a single window.
So essentially, and obviously we were strong there but with the partnership here, we believe that we can significantly simplify and speed up the way in which our customers are dealing with the complex results that you get from simulation. And it helps them absorb those results more rapidly..
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Ajei Gopal for any closing remarks..
Thank you. And thank you for joining the call today. Look, I'm really much more excited than ever before about ANSYS and the opportunity ahead of us. And I hope you'll be able to join us on September 14 for Investor Day here in Pittsburgh. Thank you again and enjoy the rest of the day..
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..