Ladies and gentlemen, thank you for standing by, and welcome to the ANSYS Second Quarter 2021 Earnings Conference Call. With us today are Ajei Gopal, President and Chief Executive Officer; Nicole Anasenes, Chief Financial Officer and Senior Vice President of Finance; and Kelsey DeBriyn, Vice President, Investor and Government Relations.
All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. At this time, I would now like to turn the conference over to Ms. DeBriyn for opening remarks. Please go ahead..
Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our second quarter Form 10-Q have all been posted on the homepage of our Investor Relations Web site.
They contain the key financial information and supporting data relative to our second quarter financial results and business update, as well as our Q3 and updated fiscal year 2021 outlook and the key underlying quantitative and qualitative assumptions. Today's presentation contains forward-looking information.
Important factors that may affect our future results are discussed in our public filings with the SEC, all of which are available on our corporate Web site. We note that uncertainty regarding the impact of the COVID-19 pandemic on our performance could cause actual results to differ materially from our projections.
Forward-looking statements are based upon our view of the business as of today, and ANSYS undertakes no obligation to update any such information. During this call, we will be referring to non-GAAP financial measures, unless otherwise stated.
A discussion of the various items that are excluded and reconciliations of GAAP to the comparable non-GAAP financial measures are included in our earnings release materials. I would now like to turn the call over to our President and CEO, Ajei Gopal, for his opening remarks.
Ajei?.
Good morning and thank you for joining us. Q2 was another excellent quarter for ANSYS, where we significantly beat our financial guidance across all our key metrics. I'm particularly pleased with our ACV performance for the quarter, which grew at nearly 23% in constant currency.
Our growing momentum from Q4 of 2020 and the first half of this year gives us increased confidence in our business and in our ability to execute against our goals. It is also further validation of our strategy of pervasive simulation, where simulation is used throughout the product development process by engineers in every discipline.
That strategy, combined with our best-in-class multi-physics products, our comprehensive go-to-market approach and our deep and lasting customer relationships has paved the way for our consistent success. The COVID-19 pandemic continues to evolve with the uncertainties of the Delta variant making headlines around the world.
Despite these uncertainties, our customers are continuing to invest in innovation, R&D and product design to drive their future successes. As such, we are continuing to see demand for ANSYS simulation increase in the marketplace, and our pipeline for the remainder of 2021 is strong.
As a result of that continued strength and our track record of execution, we are once again increasing our annual guidance for ACV revenue, EPS and operating cash flow. Nicole will provide more details in just a few minutes. Looking at Q2, all our major geographies performed well, with the Americas leading the way.
I'm very proud of our team in India, which came in above our internal plan despite challenging COVID-19 related conditions in the country. From an industry perspective, high tech and semiconductors, aerospace and defense and automotive and ground transportation were our top verticals. We also saw ongoing strength with our enterprise customers.
Following the trend of the past two quarters, we saw improved spending with small and medium-sized customers. While these smaller customers have not yet returned to their pre-pandemic spending levels, the progress we've seen over the past several months give me added confidence in the future.
One of the largest deals of the quarter was with a North American leader in semiconductors. This $39 million multiyear agreement ensures that the company will have necessary capacity to run 5-nanometer and eventually 3-nanometer designs on ANSYS’ RedHawk-SC, a gold standard power noise and reliability signoff solution for digital design.
The company has also standardized on ANSYS’ multi-physics technology across chip, package and system to reduce power consumption, thereby increasing its competitiveness in the marketplace. We also closed a $30 million agreement with a longtime automotive customer.
This leader in electric vehicle technology has expanded its use of mechanical, fluids and electromagnetic solutions, and has adopted additional ANSYS technologies including automated design analyses, multi-body dynamics and process integration and design optimization.
This customer is working with the ANSYS ACE teams to jointly develop workflows for noise and vibration analysis and topology optimization. The company is also using ANSYS Discovery to decrease its simulation backlog and get products to market faster, all the while holding the line on development costs.
Just a few weeks ago, we unveiled ANSYS 2021 Release 2, which features advances across our multi-physics product line, from structures, fluids and electromagnetics to materials, photonics and embedded software. R2 includes a number of advancements in core physics, simplified workflows, and integrated data management.
Our solutions are based on our decades of experience and cannot be easily duplicated, creating high barriers to entry for potential competitors. While I could spend the entire hour detailing each product’s capabilities, today, I will focus on just one key differentiator which cuts across our entire portfolio, namely scalability.
As customer problems become increasingly more challenging, the size of those challenges requires simulation software that can scale to unprecedented levels. Throughout our history, ANSYS has been a leader in product scalability, and we have extended that leadership in recent releases.
Our ability to create high resolution, fluid mechanics simulations with practical turnaround times enables customers to solve next generation challenges ranging from rotating machinery to external aerodynamics to environmental simulations.
Four years ago, ANSYS Fluent scaled to nearly 200,000 CPU cores, enabling customers to solve challenging problems faster than ever, by calculating billions of cells. To the best of our knowledge, that remains the record for commercial computational fluid dynamics code.
This massive scalability has enabled our customer at the Technical University in Eindhoven to solve a complex aerodynamic problem with 3 billion computational cells with 20 billion unknowns.
The most recent advances in ANSYS 2021 R2 have sped up parallel Mesh generation by 20x, removing what is often the bottleneck for detailed simulations of transient phenomena, which occur in aerodynamics and gas turbine simulations.
Our 225x speed up over the last decade has enabled ANSYS customers to reduce simulation time on a full thermal mechanical model from two weeks to an hour and a half. And now with ANSYS 2021 R2, those calculations could take just minutes, leading to improved product reliability as users run more simulations faster.
That breakthrough was made possible by doubling the core counts, while reducing the memory required by 40%. In our latest LS-DYNA release, we have significantly improved performance, which enables customers to run transient behavior studies with 28 trillion calculated variables, and that's trillion with a T.
That means safer cars and more reliable electronics. A global high tech customer used ANSYS HFSS and our new ANSYS Mesh Fusion to solve a previously unsolved integrated circuit and packaging problem by scaling across a multi-node HPC cluster with 18 terabytes of RAM and 576 cores.
In ANSYS 2021 R2, we introduced the Phi Plus mesher, which extends Mesh Fusion to deliver additional speed and capacity. Phi Plus has sped up meshing on PCB plus bondwire package models by 18x, which will bring new innovations to the 5G, autonomy and industrial Internet of Things market.
As the semiconductor customers are using next generation distributed and grid computing techniques to model and solve chips with 2.6 trillion or more devices, ANSYS RedHawk-SC set a capacity and performance record in power integrity signoff last year by extracting 66 billion electrical nodes on the design of a GPU and solving it over 2,400 CPUs in a fully distributed manner.
In ANSYS 2021 R2, our solver performance doubled, enabling customers to signoff even larger chip designs using the same compute resources and runtime. Scalability is one of ANSYS’ many differentiators and is becoming increasingly important to our customers as they develop next generation products.
We believe that our history of product scalability, along with accuracy, ease-of-use and speed to solution, create a difficult environment for any would-be competitor, while giving our users the functionality they need to solve the most challenging product problems.
We are continuing to train the next generation of engineers in the use of ANSYS solutions by expanding our free offering for students. To date, nearly 2 million students around the world have downloaded our products.
And just a few weeks ago, we launched an additional offering for students to download our Electronics Desktop, and to enroll in ANSYS innovation courses for training. These students now have access to our leading electronics products, including HFSS, Maxwell and Icepak to train them in developing the products of tomorrow.
And thanks to our new partnership, Cornell University will design and develop online training courses with real-world applications from ANSYS. Moving to partnerships, I'm excited to announce that we have expanded our work with TSMC to include new certifications for ANSYS RedHawk and ANSYS Totem.
These new certifications for power network extraction, power integrity and reliability, signal electromigration and transistor level custom designs enable joint customers to meet critical power, thermal and reliability standards for next generation product applications.
ANSYS continues to be recognized for our inventive approach to engineering technology. I'm proud that for the third year in a row, Fast Company has named us one of the best places to work for innovators. I'm even more excited that five of my colleagues have been recognized with the prestigious Women of Color STEM awards.
These awards showcase the outstanding scientific and engineering achievements of women around the world. And ANSYS is proud of these pioneers, who serve as an inspiration for us all.
Turning to our environmental, social and governance initiatives, I'm pleased that MSCI has upgraded our ESG rating to AA, naming us a leader in the software and services industry.
MSCI cited ANSYS’ comprehensive talent pipeline relative to our peers, our focus on business ethics, and our capabilities in helping customers to innovate in areas such as clean technologies. To summarize, Q2 was another great quarter for ANSYS, and a further validation that our pervasive simulation strategy is resonating with the market.
Our strong sales pipeline, our ongoing momentum with enterprise customers, the resurgence of small and medium businesses, and our continued leadership across our product portfolio, give me further confidence in our ability to meet our newly increased outlook for 2021. And with that, I'll turn the call over to Nicole..
Thank you, Ajei. Good morning, everyone. Let me take a few minutes to add some additional perspective on our second quarter financial performance and provide context for our outlook and assumptions for Q3 and 2021.
Our strong Q2 results reflect an outstanding execution across our business which yielded revenue, operating margin and EPS, all above our Q2 guidance. As Ajei mentioned, Q2 ACV was especially strong and exceeded our expectations.
Both our large enterprise customer and our small and medium-sized customer spending patterns performed better than expected and our growth during the quarter was broad based. Now let me discuss some of our Q2 financial highlights. Q2 ACV was 430.5 million and grew year-over-year 25% or 23% in constant currency.
We saw strong performance across customer types, geographies and industries. ACV from recurring sources represented 82% of the total. Q2 total revenue was 452.6 million and grew 16% or 14% in constant currency, which exceeded the high end of our guidance. Like ACV, Q2 revenue growth was strong across the business.
In the first half of 2021, we had strong top line performance with ACV and revenue both growing double digits, 16% and 18%, respectively. We closed the quarter with a total balance of GAAP deferred revenue and backlog of 927.1 million, representing a 10% increase over last year's second quarter balance.
During the quarter, we continue to manage our business with fiscal discipline. This yielded a solid second quarter gross margin of 90% and an operating margin of 41.7%, which is better than our Q2 guidance. Operating margin was positively impacted by revenue performance above our guidance as well as the timing of investments.
The results for second quarter EPS of $1.85, which was also above the high end of our guidance. Similar to operating margin, EPS benefited from strong revenue results and the timing of investments. Our effective tax rate in Q2 was 19%, the tax rate we expect for the remainder of 2021.
Our cash flow from operations in Q2 totaled 118.9 million, which benefited from strong collections driven by a reduction in the percent of receivables past due and was partially offset by differences in the timing of tax payments as compared to Q2 2020. We ended the quarter with 958.2 million of cash and short-term investments on the balance sheet.
Now let me turn to the topic of guidance. We continue to build confidence in our outlook for the year. Coming off our strong finish in Q2, we are initiating guidance for Q3 and increasing our ACV revenue, EPS and operating cash flow outlook for the full year.
This increase reflects the strong broad-based financial performance in the second quarter and our current sales pipeline. For the third quarter, we expect revenue in the range of 400 million to 425 million and EPS in the range of $1.22 to $1.39. As I mentioned, for the full year, we are raising our ACV revenue, EPS and operating cash flow outlook.
We are increasing our full year ACV outlook to be in the range of 1,800 million to 1,845 million. This represents growth of 11.4% to 14.1% or 10.8% to 13.5% in constant currency. We are raising our full year ACV guidance to reflect the Q2 performance which exceeded our expectations, and our increased confidence in the full year pipeline.
This raise was offset by a few million dollars of currency headwind. As a result, we are raising the midpoint of our ACV guidance by 30 million, which translates to an increase of 2.7 points of constant currency growth compared to our May guidance. As a reminder, it is best to look at full year ACV growth as quarterly growth can be variable.
As we mentioned in May, ACV quarterly growth rates in 2021 will vary with Q2 and Q3 being the strongest two quarters. Based on our performance in Q2, we expect Q2 to have the highest ACV growth rate for the year. As a reminder, we still expect Q4 growth to be muted given the Q4 2020 growth comparisons.
Consistent with prior years, the dollar value of ACV will be highly skewed towards the fourth quarter. We expect revenue to be in the range of 1,840 million to 1,890 million, which is growth of 8.5% to 11.5% or 7.3% to 10.2% in constant currency.
Similar to our ACV guidance, this increase reflects our strong Q2 revenue performance and increased confidence in our full year pipeline, offset by a few million dollars of currency headwind.
As a result, we are raising the midpoint of our revenue guidance by 23 million, which translates to constant currency growth of 1.5 points higher than the midpoint of our May guidance. As you know ASC 606 introduces revenue growth volatility within the quarters. However, on a full year revenue basis, revenue growth is less variable.
In the second half of 2021, we expect revenue growth to be impacted by the year-over-year compare and mix of business. We are increasing our full year EPS and now expect EPS to be in the range of $6.85 to $7.15. This increase incorporates our strong Q2 performance and is offset by a few cents of currency headwinds.
It is worth noting that some of our strong Q2 EPS performance was driven by the timing of investments that moved from Q2 to the second half of the year. Now let me turn to our full year operating cash flow guidance. We are increasing our 2021 outlook to a range of 495 million to 535 million.
This increase is driven by stronger collections expected during the year, and continued improvement in payment terms toward pre-pandemic levels. We are pleased with our strong first half in operating cash flow. But as a reminder, second half cash flow is most impacted by whether large Q4 deals close near the beginning or the end of the quarter.
For modeling purposes, we’re expecting third quarter operating margin in the range of 34% to 36.5%. And for the full year, we continue to expect operating margin to be in the range of 40% to 41%.
Further details around specific currency rates and other assumptions that have been factored into our outlook for Q3 and 2021 are contained in the prepared remarks document. I would like to thank the ANSYS team for their continued commitment to our customers and fellow colleagues during this prolonged time of uncertainty.
The team delivered exceptional execution during the quarter, which drove our strong Q2 financial performance. The combination of best-in-class execution with a strong recurring business model and growing sales pipeline sets us up well to deliver on our 2021 outlook, as well as our longer-term financial objectives.
Operator, we will now open the phone lines to take questions..
We will now begin the question-and-answer session. [Operator Instructions]. Please limit yourself to one question and one follow up. At this time, we will pause momentarily to assemble our roster. The first question comes from Ken Wong with Guggenheim Securities. Please go ahead..
Great. Thanks for taking my question. Nicole, I just wanted to maybe check on ACV, really solid performance here.
Would you characterize the strong results as just sort of increasing the conversion rate of the pipeline, or did you actually see an uptick in demand and potentially a boost to the overall pipeline that’s giving you higher confidence in the raise?.
Yes. Thanks, Ken. Yes, we were really pleased with not only the second quarter, but where we landed on the first half overall, as you know, translated to 16% growth overall for the half, which was fantastic. The team really delivered.
I would say that it went back to a very similar pattern that we saw in Q1, which was it was broad-based across geographies and industries. As you recall, coming into the year, we were a little bit cautious about SMB and kind of the underlying momentum of SMB. And we had expected enterprise customers to perform as expected.
I would say in the second quarter, we got a bit more out of the enterprise than we expected to get, which was great, because it showed people are really seriously committing to their R&D portfolios and accelerating development.
But we saw, for the second quarter in a row, that resurgence on the SMB side, and there wasn't anything that was specific, localized or kind of in narrow form. It was just kind of everywhere.
So I would say it's that really kind of broad-based performance that we saw really in the second quarter and the first half that contributed to the confidence that we had in raising our overall ACV for the year by the 2.7 points at constant currency..
Got it. And then you touched on SMB, also you guys mentioned that it was kind of tracking back towards pre-COVID levels. Any rough sense of kind of where we are? Not sure if there's a way to kind of quantify if we are maybe 60% of the way there, 70% of the way there.
But would love to get a sense for how much more there is to close the gap before we're back to what you might consider normal for that piece of the business?.
Yes. As I mentioned before, we were really pleased with the momentum we saw in the quarter and the strength we saw. What I would is, the guidance that we have going into -- the reason the full year was really not counting on SMB coming back to those pre-pandemic levels. There certainly is a lot more activity, there's a lot more engagement.
But this does happen over time market by market. It does vary too, in terms of the rate and pace of speed of how these customers are coming back.
And so, while I don't have a specific quantification to give you, what I would say is that if it happened at a more accelerated rate that's not -- and we were all of a sudden back to pre-pandemic levels by the end of the year, that's not something we've really contemplated in our race..
Great. Thank you very much..
The next question comes from Gal Munda with Berenberg. Please go ahead..
Hi. Good morning and thank you for taking my question. The first one was just kind of reflect a little bit on brands in terms of operating cash flow and ACV and how ACV outperformance also kind of allows you to raise the cash flow estimates for the year.
It's interesting, because what we've seen is 30 million upgrades in ACV resulted in about 15 million in operating cash flow, which kind of suggests that 50% incremental conversion.
Is that something that we could -- is that something that as you continue to perform, it still kind of is replicable going forward? Just maybe a little bit in light of potential investments or something that you might also balance out on the other side?.
Sure. So let me break apart the components of cash flow. So as you point out, cash flow is more highly correlated to ACV because of the way 606 treats revenue recognition, so that is exactly the right way to look at it. So there's two components to it. There's the collections piece along the ACV side, and then there's the payment side.
And so on the collection side, we have seen an improvement at a more accelerated rate, both in terms of lack of asking for extension on payment terms, people catching up on each payment, and people overall maintaining a level of current balance at higher rates than they had through the pandemic.
So all of that is I think contributing to the acceleration on -- part of the acceleration on the cash flow side. The headwind in this particular quarter was really tax payments and the timing of tax payments, particularly in a quarter can have a more distorting dynamic overall.
And so, as you recall, last year, there were some deferral incentives during the pandemic that raised cash flow in the second quarter, and then this year those payments were due as expected in the second quarter.
And so, overall, I would expect to see still a little bit of capitulation and volatility in the relationship between the two, just because the nature of the payment piece is not kind of back to normalized levels.
But what you can count on is that underneath the covers, the momentum around collections and customers’ kind of behavior around that has been quite good. And we're really happy with where we're at..
Got you. And then just as a follow up, you said that SMB strength has really come in. And what we say usually is that SMB is a good indicator, leading indicator of the kind of underlying demands of the business The other way that you could say it also, if the larger deals are starting to kind of close a little bit earlier.
Is that something that you're starting to see as well at better close rates? Did you have any plans potentially from a quarter as well?.
I think that we saw a very balanced growth and performance across the enterprise side and the SMB side. And so what we are seeing is that customers are using simulation to continue to accelerate their development roadmaps and the optimism around needing to make those investments overall.
And so there was really no timing dynamic here of any meaningful -- to any meaningful degree other than the normal things that followed before and after the dateline in any normal quarter. It really is -- the performance in the quarter was really a statement of the overall momentum that we're seeing in customers’ behavior overall..
Right, which is supported by the smaller deals as well. Awesome. Thank you so much..
The next question comes from Adam Borg with Stifel. Please go ahead..
Hi, guys. Thanks so much for taking the questions.
Maybe just on ANSYS Cloud, Ajei, would love an update there and how things are tracking as we think about post pandemic plans?.
Sure, Adam. So, as you know, ANSYS Cloud provides managed access to HPC resources and that allows our customers to essentially run larger and higher fidelity simulations. And as you know, the cloud also supports a very flexible licensing model.
And that includes an elastic pay-as-you-go model as well as a hybrid model that allows customers to mix and match elastic as well as lease licenses. Now we have a number of internal metrics that we deploy to measure the business. And we are seeing probably a 5x greater usage as compared with this time last year.
And that has very nice growth as a result of the activities that we've done as well as, of course, external conditions with people working from home. This year, if you think about what we've done to augment the cloud, we've added cloud support for ANSYS LSTC, for ANSYS DYNA, for our Lumerical products.
We've completed SOC2 certification and we also continue to focus on the overall customer experience. And that's really translated very positively for customers.
And we -- a couple of months ago, few months ago, we published a release about a customer, Van Oord, who talked about how they could speed up their simulations by 7x, which obviously is a significant perspective, because they're able to take advantage of the most recent and most capable hardware in the cloud, as well as the cloud capabilities that we have.
So we're very excited about our cloud direction. We have made all of the necessary investments. And, of course, it's still early days, because we're talking about a relatively small portion of our business..
That's really helpful. And maybe just a quick follow up for Nicole, just on perpetual license. That's been really strong in the last few quarters. I know there's been this ongoing trend towards term versus paid off.
But I'd love to think about or hear a little bit more about how you're thinking about perpetual license growth over the back half of the year? And is that strength in part due just to increase in confidence in the markets and the ability to deploy larger deals like that? Thanks so much..
Yes. So we did see -- in the first half of the year, we did see relatively more professional license growth than we've seen in the past. And what I would say is that that long-term trend of shifting towards the lease model still continues, right. So as you recall, there were dynamics last year where perpetual was a little bit more muted.
And I think what you're seeing this year is just some of the return of some of that business overall. But if you look at the business over longer periods of time, the growth and acceleration of the business is really driven by the lease model, and the perpetual business has been roughly flat over those longer periods of time.
In terms of the second half, I think one of the dynamics that we saw in Q4 last year was not only exceeding the high end of guidance by $45 million, but there was a significant perpetual mix in Q4. And so how we're looking at it on a go-forward basis is not really expecting that repeat performance in Q4 overall.
It is some of the underlying factors that are baked into the guidance..
Super helpful. Thanks so much..
The next question comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead..
Thank you. Good morning. Ajei, for you first. Within the context of your large multi-solution solver sales, could you talk about the incremental demand within those deals that you may be seeing for any or all of the smaller brands such as Minerva, Granta, Esterel, [indiscernible] and so forth.
Are those becoming incrementally important within the context of those deals? And then as well, in your prepared remarks, you noted your semiconductor and high tech business.
As this week is the 10th anniversary of the Apache acquisition closing, perhaps you could share your thoughts and how you're thinking about your EDA business for the next number of years, and the kinds of internal investments that you think you'll need to be making over the next number of years to keep that business growing? And then lastly, for Nicole, your services revenue were down sequentially in Q1.
And yet over the last few months, there's been a discernible uptick in your openings for technical support and consulting positions.
So from that, should we infer that you are anticipating an improving pipeline in terms of engagements and deployments activity?.
Jay, thanks for the question. Let me start with your comments or question about some of the smaller products. As you know, some of those products organically developed, others came in through acquisition.
And we embark on activities such as an M&A or organic development, specifically when we see opportunities in the market where customers are either leading us or where we see an opportunity to provide greater functionality to solve the customer problem.
And so all of the acquisitions or an all of the internal development that we do is driven by an analysis of what that market would look like. And I'm delighted that we're generally seeing what we expected to see pan out is in fact panning out.
You talked about Lumerical photonics, that's obviously a very important part as you think about data centers, for example, and we're seeing obvious attraction there, because this product fits into our overall portfolio.
So when we go to customers, we can go to them with a broader set of capabilities that includes critical capabilities, such as Lumerical, that you mentioned, where we can go in and talk about an end to end solution that addresses the needs that the customer may have.
And you see that repeated across our portfolio, where smaller products are playing important roles in being able to stitch together an end to end workflow to allow customers to solve some of the most complex problems that they're dealing with. So I think that's -- hopefully that addresses your first question.
With respect to your second question, I'm excited, obviously, with our performance in high tech and semiconductor. I no longer think of the Apache acquisition. That's part of our semiconductor organization and has been for a number of years.
And obviously we have a number of deep integrations across our portfolio between our semiconductor business and our electromagnetics activities.
And you start to think about next generation products like 3D-IC and challenges, and that's when the entire ANSYS portfolio comes in, going from our semiconductor portfolio all the way through our more Newtonian physics, if you will. And so I'm very excited about the portfolio, the capabilities.
I think we have market leading products across the board there. And customers tell us that they're able to solve tremendous challenges with our offerings, and we're excited about the future..
Yes. And, Jay, to your services question.
So specifically, this year we really -- we do expect to see services disproportionately impacted by COVID, just because of the nature of services being more in-person, particularly with the Delta variant and some of the either self-imposed or imposed restrictions that customers are having around in-person engagement.
So we're not anticipating in our guidance any increase -- any meaningful change in the trajectory of the services business.
In terms of the skill sets that you're referring to, I’d say that, yes, we are hiring, we are investing in the business, we're investing in the areas that you and Ajei just discussed now around helping our customers connect physics together with multi-physics. And so those are skill sets that we continue to invest in.
And that services business is also -- that investment in the services business is also a reflection of the momentum we're seeing in the pipeline around sales, because those individuals also support selling process to some degree.
So, overall, I think what you're seeing is a good set of momentum around customers starting -- continuing to accelerate their R&D pipelines and leveraging ANSYS to do so. And that's why we're making the investments in this space..
Thanks very much..
The next question comes from Andrew Obin with Bank of America. Please go ahead..
Yes. Good morning..
Good morning..
Good morning..
Just looking at the indirect channel, it seems like it's performing very well.
Are there any partnerships that are really gaining traction, or other reasons for this growth? And you might have touched on them in your previous comments, but just unpack that?.
Yes, you should think of our indirect channel consistent with some of the growth that we're seeing in SMB, because our indirect channel partners are oftentimes supporting customers who are lower down in the pyramid, while some of the larger global organizations are handled by a direct sales force.
So that's really the dynamic that you're seeing, and that growth is reflective of that dynamic..
And just a broader question. Your outperformance this quarter internally, how do you think as you put it into three buckets? One, reopening; b, your customers structurally investing more; and c, just your strategy as you're sort of expanding and getting your products in the partners’ ecosystem adjacencies.
Internally, if you're trying to sort of attribute this outperformance this quarter, short-term macro, long-term structural thing or your strategy, how would you sort of our allocate the outperformance into these three buckets? Sorry for a long question..
I think it's really difficult to point to a specific allocation of one bucket to another, because these things are all related to each other. At the end of the day, if you just reflect on the ANSYS portfolio, what we built is a market leading set of capabilities of individual physics, which are connected together.
And so this multi-physics capability is what's necessary for customers as they solve some of the most challenging problems that they're dealing with.
And so as you think about electrification, for example, or 5G or IoT, all of these areas are complex customers that are investing a significant amount of money, they are looking for simulation offerings to be able to support them in their R&D efforts.
And we have the technology, we have the capabilities, we have the relationships, and we can support them on their journey. So that's a very important aspect. You've got to have the right goods when people need them.
The second thing is that, obviously, around the world, we're seeing a set -- we're seeing customers recognizing that there is going to be an end to the pandemic, and that they have to continue to make investments in R&D.
And certainly the small and medium business customers are perhaps most emblematic of that, because they are -- early in the pandemic, you saw a shutdown for SMB customers, right.
They’re most concerned about cash, they're most concerned about the potential demand future because these are smaller companies and they have less, they have lesser cash resources than some of the larger companies.
But what we're seeing now is obviously an opening up of spending there, which is reflective of the fact that customers around the world, not just SMB customers, customers around the world are looking at the world after things completely open up again, or certainly after a pandemic world, post pandemic world where things start to get back to normal with respect to the broader economy, which means -- and they recognize that in order for them to be successful, they have to have products that people want.
And that means more investment in R&D and more investment in product design, as I mentioned in my comments. So the demand is also increasing. And I think that those two things work together. You have to have the right products. You have to have the growing demand.
If you didn't have either one of them, you wouldn't necessarily be able to deliver the results. And I think that we are -- that's exactly what we're seeing. And we're very excited about what we can provide to our customers and where the market is going..
Yes. And I would add just one additional point to what Ajei said, which is the ANSYS team and the execution of that team. The sales team and services teams were there alongside customers throughout the pandemic. We've made investments in supporting our customers throughout that pandemic.
And that puts us in a position of strength as customers are coming out of it and making the decisions that Ajei referred to. As you know, enterprise software sales cycles are long.
So if you're not there and you're not committed to your customers and you're not delivering value even in times where they're not quite ready to invest at the levels that they're comfortable with in a time like the pandemic, it pays off in the end.
And you can see that particularly in some of our markets like Asia Pac and other places where the team has just been exceptional in the way that they have managed and deepen those relationships with customers..
Was there a follow up?.
Apologies. I put myself on mute. No. Thank you very much..
Thank you..
Thank you..
The next question comes from Saket Kalia with Barclays. Please go ahead..
Okay, great. Hi, guys. Thanks for taking my questions here and fitting me in. Nicole, maybe just for you, just a little bit of a housekeeping question. I think you mentioned the ACV constant currency guide was about 10.8% to 13.5%.
Can you just remind us how much of that is organic versus inorganic?.
Yes. So at the beginning of the year, we talked about AGI contributing $80 million to this year. And so we're still seeing that as the current trajectory..
Okay, got it. That's helpful. And then for my follow up, maybe for you, Ajei.
Can you just talk a little bit about Simulation Live and how you feel that's trending? I noticed a little bit of a longer -- sort of a long-term story, but curious what the update is and how you feel about it?.
You mean Discovery, right?.
I’m sorry. Yes, absolutely, Discovery Live. Sorry, I was calling to PTC. Discovery Live, yes..
Yes. So, look, we're very excited about Discovery. And I think perhaps to make it real, a little bit more tangible, perhaps I can go back to the example I gave in the script, which was one of our customers who's using Discovery in a very interesting way.
So for this particular customer, some of the detailed flow and thermal management simulation is done by experts using ANSYS flagship products. But the typical turnaround time is maybe 60 days, because of the complexity of the simulation. And they have a relatively small analyst team serving a larger design team.
So they introduced Discovery as a way for the design engineers to do some of the simpler simulation on their own. So things like flow distribution or pressure drops. So they're able to do that by themselves. And they can improve the design of their components before they hand off the design for a complete system simulation to the expert analysts.
So that's an example where the whole thesis that we had was, this is something that design engineers could use to really amplify the capability of the analysts, that's something that's borne out here.
And for this customer, they're also using -- they also have some outsourced CAE spend, and they're using Discovery now to help train their designers on some basic structural analysis so they can limit some of this outsourced work on simple geometry changes.
And what that does for them is it changes the design iteration time and it takes it down from a couple of weeks to a couple of days. So that gives you some perspective. We're very excited about the technology. We continue to make advances in the technology. And obviously I mentioned a couple of customer examples.
You talked briefly about PTC and the use of Creo Simulation Live. And on PTC’s earnings call last week, I believe they reported continued traction with increased expansions driven by a migration around Creo 7.
As you know, they are OEM-ing our Discovery products into Creo Simulation Live, Creo ANSYS simulation, and Creo 7 is their latest enterprise release. And so, obviously, there's increased traction that comes from that.
And they also talked about a customer where the real-time simulation capabilities were helping to simplify the customer's design process. So we're very, very excited about the technology. It continues to perform as we had expected. Obviously, it's a relatively small piece of our business. But the market dynamics around what we're seeing is strong..
Very helpful. Thanks, guys..
Thank you..
The next question comes from John Walsh with Credit Suisse. Please go ahead..
Hi. Good morning, everyone..
Good morning..
Good morning..
I wonder if you could talk a little bit about your acquisition pipeline. You were able to get Phoenix done, which looks like it bolts on nicely to AGI.
Just what are you seeing there and what can we kind of expect there from a capital allocation perspective?.
Yes. So, as you point out, the greatest return we've been able to provide on the deployment of excess cash has been utilizing it to acquire a second M&A. And the example of something like Phoenix is a great example of a premier technology which helps us accelerate. Another investment we made in December around in AGI.
Phoenix provides model-based engineering. So I would say that you should expect that we will continue to execute strategy, which is consistent with our model, which is to achieve double digit growth with tuck-in acquisitions overall. So the decision on -- the capital allocation decision and the focus on M&A hasn't changed..
Great. And maybe just a follow up to that. During the quarter, you had put out a press release about a customer looks like expanding the relationship they had with ANSYS. One of the things that I found interesting was more stringent regulations around greenhouse gas reduction and how they're using simulation to help that.
You've talked in the past about sustainability and how you can help your customers. But the drumbeat just seems to be getting louder and louder.
Are you seeing customers accelerate any decisions around this sustainability focus, or is it still -- is that still kind of an extra add-on benefit to what you're already bringing to the customer?.
So I think the sustainability aspect is clearly important across a number of different dimensions for different customers.
When you look at, let's say, for example, a big trend in the automotive industry, which is around electrification, right? Obviously, there's a discussion about the future of the internal combustion engine and the rate and pace at which electric cars and vehicles will be adopted broadly.
And you're seeing car companies, for example, making the decision to just simply move from one to the other. And that's obviously driven in part by issues of emissions and being more eco-friendly.
We talked last year about -- in the aerospace industry, we talked about some customer wins, where the motivation for the customer was really to make their engines more fuel efficient. So it was about light-weighting, it was about reduced fuel consumption, increased efficiency of fuel.
And so even in aircraft engines, for example, you're seeing that as being a primary driver for new design of engines. And so it's absolutely part of a broader trend. I mentioned Van Oord earlier. They're, of course, building sustainable offshore wind turbines. And they're a simulation user. But again, their focus is on renewable energy sources.
So compliance purposes as well as eco-friendly, all of these things are drivers of product design and product requirements. And obviously to ensure that customers can meet those standards, simulation plays a really important role..
Great. I appreciate you taking the questions. Thank you..
The next question comes from Blair Abernethy with Rosenblatt Securities. Please go ahead..
Thank you and nice quarter, guys. Just a vertical question here, Ajei, just first off on the auto vertical. As you look at the shift from ICE development to electrical vehicles, obviously a completely different product.
Is there -- do you have a sense at this stage as they move away from ICE design and new model introductions to pure electrical, what is the ANSYS footprint change in the auto vertical look like? Does it grow or does it -- obviously 10 years from now, maybe we have a lot less ICE engineers out there.
And secondly, you called out in your prepared remarks the healthcare vertical and a large win in using simulation software to train some algorithms. Can you just maybe expand on that a bit? And how big might that opportunity be in the healthcare vertical? Thanks..
Firstly, with respect to automotive, what's exciting for us is that we have the technology and the capabilities from a product perspective and a relationship perspective to support our customers as they go through that transition. So we can help them with battery management technologies.
We can help them with electric drive trains, electric motor design, all of the elements that you would expect that would sort of go into the replacement of the internal combustion engine with an electric battery powered environment.
But above and beyond that, if you think about the challenges that some of our customers are facing as they make this transition, an electric car is not just simply an internal combustion car with one means of propulsion replacing another, it's an opportunity for our customers to redesign.
In fact, they have to redesign it, because the assumptions that are previously made of an engine in the front of the car, which concentrates the weight in the front of the car, those assumptions are no longer relevant, because perhaps now you have a battery that's uniformly distributed across the floor of the car.
And so that changes the weight distribution and changes the assumptions of the way that the car was originally designed.
And so there is a significant rethinking taking place in these car companies, especially the auto companies who have historically relied on the reuse of technology from one generation to another, there is a rethinking of saying, what does it mean for us to support this to build an electric car? And so all of that leads to and drives increased use of simulation and certainly for ANSYS simulation.
You think about crash design, right? So the problems that you may have been dealing with earlier for crash might have been, how do you think about the passenger and will the passenger be protected? And that's a complex multi-physics problem, because you're dealing with the structural integrity, you're dealing with the deployment of the airbag, which is the fluids problem.
So there's a multi-physics problems in nature that need to be addressed through simulation.
Now the question is, it goes above and beyond that, and it says, well, what is the likelihood of a fire or some kind of a catastrophic fire that might take place as a result of a battery rupture? Can you solve that problem? So it starts to become more and more challenging.
And so this transition is not just a matter of supporting the design of the engine per se, it is the actual car in the aggregate and that sort of plays well to our strengths and our capabilities. Now with respect to your second question about healthcare.
While healthcare is still and overall a relatively small part of the ANSYS business, simulation continues to grow. And we do well in, for example, the design and the manufacturing of medical devices. And that was obviously reflected in the performance in the quarter.
But as we look to the future, we are excited about the increased use of simulation as a validation in the market. So the use of in-silico trials as opposed to just in vitro, in vivo. And the use of simulation techniques supporting those in-silico trials I think is really helpful.
And we're working with early adopters who are using simulation to target specific surgical outcomes. And this is obviously early, early stage. There's not really much revenue associated with it; very, very early stage. But this is about how do you support a physician as they’re making decisions about surgery.
Those are at the end of the day, some of those can be simplified into problems of computational fluid dynamics. And, of course, we have fantastic technology in that space. And so being able to put all of that together and packaging that, I think that's certainly something for the future..
Thank you. That's all the time we have today. I will turn it over to Ajei to make some closing comments..
So thank you all for your questions. And I want to thank all my colleagues at ANSYS and our global partner network for your amazing work, your dedication to the company and for continuing to drive the success for ANSYS and our thousands of customers around the world.
With our excellent start to the year, a strong pipeline and the unprecedented levels of innovation that we're driving across our multi-physics products, I'm confident that we will meet our newly raised goals for 2021. And with that, thank you all for attending today's call. And I hope you enjoy the rest of your day..
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..